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Perceptions and praying for our peers

Biggest threats to Greece’s recovery are how others view the country and other eurozone states’ performance By Dimitris Kontogiannis

The performance of the eurozone’s other economies over the next few quarters will be much more important to Greece’s than the seemingly meager impact from the geopolitical crisis in Ukraine, Russia and elsewhere. However, the perception regarding Greece’s commitment to streamlining its economy amid increased political uncertainty ahead of the vote for the new president of the republic in Parliament will be even more important.

The recent embargo on Greek and other European Union exports to Russia and the estimated impact on the local tourist industry from the drop in the number of Russian tourists – the fastest-growing market segment over the last few years – will have a very limited effect on the economy, assuming this adverse trend doesn’t extend well into 2015, according to analysts. It is definitely not good news for the seemingly fragile recovery under way but does not pose an insurmountable obstacle at this point.

On the other hand, the stagnation of the eurozone economy, the biggest export market for Greek goods and services, could have a bigger and faster impact if it continues. Readers are reminded that the eurozone economy’s real gross domestic product was flat quarter-on-quarter during the April-June period, with some large economies either stagnating or shrinking, according to preliminary data. The weak economic activity has fueled concerns among analysts and policymakers, who are calling for a less restrictive fiscal policy and a more accommodative monetary policy.

European Central Bank President Mario Draghi told other central bankers at their annual meeting at Jackson Hole in Wyoming that the ECB stood ready to take additional measures if those announced in June failed to anchor inflationary expectations. He also appeared to be in favor of more flexibility in implementing the fiscal compact rules, which brings him closer to his compatriot, Prime Minister Matteo Renzi. It is noted the Italian economy, the third largest in the eurozone, shrank in the second quarter and is now about 9 percent lower than when the crisis started. The Italian real GDP is at the 2000 level according to analysts. Harvard Kennedy School Professor Jeffrey Frankel has pointed out Italy would have been in a recession for the last six-and-a-half years if the term was defined according to US standards.

It is obvious sluggish economic growth in the eurozone does not bode well for the fragile Greek recovery, which seems to be under way, since demand for export goods and tourist services will likely be weak. It is noted the flash estimate showed that real GDP shrank by 0.2 percent year-on-year in the second quarter on its way to a positive reading in the third quarter boosted by a good tourist season and the apparent stabilization in private consumption spending. More importantly, unofficial estimates point to a positive change, of around 1 percent, in seasonally adjusted GDP data compared to the first quarter.

It is not a coincidence that new hirings exceeded layoffs and labor contract expiries by about 190,000 in the private sector during the January-July period, according to official Labor Ministry figures. This is the highest number since at least 2001 for the same time span. Hirings surpassed layoffs by about 92,000 in the same seven-month period in 2013. It is definitely a good sign for the economy but one has to take into account the fact that full-time jobs represented 53 percent of total hirings. Moreover, the new jobs must pay low wages given the profile of the new openings – i.e. waitresses. Some jobs must be seasonal – linked to the tourism period – as well.

Although the disappointing output data from other eurozone economies pose a risk to Greece, especially if they last for many more months, the biggest challenge to the country will likely come from another source – the perception of markets and policymakers in the EU and elsewhere regarding the country’s commitment to restructuring its economy and sticking to fiscal discipline. This is more so as the time for the vote in Parliament for the new president of the republic approaches. It is scheduled for February-March 2015 but it could take place as early as this fall, analysts say.

At this point though it looks as if there is a greater chance the vote will take place next year. Readers are reminded that any candidate will need 180 votes in the 300-seat Parliament to be elected and failure to do so will result in national elections. This is bound to increase political uncertainty in the months ahead at a time when the troika’s review will be expected, not to forget talks on debt relief measures.

If Greece keeps on meeting or surpassing its fiscal targets, advances the privatization agenda and delivers on a few structural reforms, market perceptions will not be an obstacle to economic recovery despite any increased political uncertainty. The state and companies may be able to tap the markets again and the core banks to raise enough capital from private sources to cover any capital shortfalls identified by the ECB’s asset quality review and stress tests. In fact the economy may even enter a virtuous cycle. The opposite will happen if it fails to meet the minimum targets.

The power of perception at a time of an anticipated rise in political uncertainty and the economic performance of the eurozone trading partners represent the real threats to the story of the Greek economic recovery. If the country manages to positively influence these perceptions and economic activity in the eurozone picks up, it would have made a big step in the right direction, irrespective of geopolitical risks.